News

A review of approximately 20 currently used subcontracts was recently conducted by one of our major insurance carriers. The intent was to ascertain whether these subcontracts allowed the construction manager/general contractor to recover consequential damages from their subcontractors. This review revealed that about one-third of these subcontracts contained the specific phrase "consequential damages". Although the remaining two-thirds of the reviewed subcontracts did not directly mention consequential damages, there was an indication the contractor might recover "any and all damages" incurred as a result of the subcontractor's default. In either case, the exposure to consequential damages existed. It is clear that many subcontractors are not identifying the risks in subcontract documents when bidding jobs.


Quantifying a subcontractor's exposure for consequential damages on revenue generating projects (stadiums, condominiums, casinos, apartments, retail faciilites, toll roads, office buildings, etc.) is very difficult. It is not uncommon for construction managers/general contractors to pass most, if not all, of the consequential damages exposure down to their subcontractors.

On revenue generating projects, construction managers/general contractors are generally unwilling to waive consequential damages entirely. On these projects we recommend the following steps be taken:

• Evaluate the risk of consequential damages in the subcontract. For example, are liquidated damages the sole and exclusive remedy of delay for the construction manager/general contractor? If so, the subcontractor needs to determine if the daily liquidated damages amount is reasonable. This information is typically contained in the "Default, Damages, Scheduling and/or Indemnification" provisions of the subcontract.


• If liquidated damages are not the construction manager's/general contractor's sole and exclusive remedy for delay, or damages have not been liquidated, does the subcontract contain a mutual waiver of consequential damages? If not, we recommend the subcontractor negotiate for a clause containing an appropriate cap on the consequential damage exposure. We do not recommend subcontractors accept a cap that exceeds 25% of the subcontract amount (less is better).


• In the event the construction manager/general contractor is unwilling to cap the subcontractor's consequential damage exposure, the subcontractor will need to obtain a copy of the contract between the owner and construction manager/general contractor. A determination must be made on whether or not any limitations exist on the types of damages the owner can recover from the construction manager/general contractor as those damages typically flow down to the subcontractors.
  
  It is important to note that on many large revenue generating projects the subcontracts are executed before the construction manager's/general contractor's contract with the owner is finalized. In situations such as this, it is important the subcontrator negotiates for contract language liquidating and/or capping its consuequential damages exposure as there is no way to ascertain what the exposure will be until after the contract is finalized.